Return Concepts

if the historical data displays survivorship bias, the historical risk premium estimate should be adjusted downward, not upward…

Can somebody explain the logic here? I thought survivorship bias means only the good performing funds are taken into account hence the risk premium is too low (compared to what it would be if all funds were considered) as it only considers the good performing funds… so to adjust the risk premium should be adjusted higher…

high risk = high risk premium… please correct me if i am wrong.

If historical data included those defunct companies, there’s higher risk. Without them, risk premium can be lowered.

Frank easiest way to think about that is that ERP is (Return Market - RF)

Think about the factors and how they impact this formula. If survivorship bias is present then the return market is higher and therefore ERP is a higher number. Therefore the ERP is inflated too high because of strong performing stocks and needs to be adjusted downwards to more realistic levels.

Thanks self_employed and Rex… makes senes now